Technical analysis is a technique that can be used to attempt to forecast the future direction of security prices through the study of past pricing patterns, primarily by the use of price and volume charts. The technical analysis industry is positively exploding. Search engines list tens of thousands of web sites devoted to technical analysis.
Nonlimiting examples of methods for performing technical analysis include O.H.L.C. bar charts and candlestick charting. Regarding O.H.L.C. bar charts, the designation of the traditional bar chart is O.H.L.C, an acronym for open, high, low, close. The name itself creates an assumption of intra-period movement, which may or may not be correct since the importance of intra-period patterns are not recognized or addressed in the traditional charting methods. Each bar represents a period of time within a graph that illustrates price intervals vertically and time intervals horizontally (See FIG. 1) Time periods most commonly represented are for trading days but they can be for any period such as a week or month. Day traders even use bar charts based on individual minutes.
The bar itself consists of a vertical axis representing the range of price for the period covered. A horizontal dash projects from the left side of the vertical axis at the price level in effect at the start of the period. Another horizontal dash projects from the right side of the axis to illustrate the closing price for the period.
In addition to revealing the opening, closing, high, and low prices for the period the bar chart tells us the range of price movement and whether the price was up or down for the period. By comparing several bars in a series we can determine price trends, price volatility, and any developing price patterns. Normally a second set of verticals is located below the price graph to indicate sales volume with taller bars representing higher volume.
Regarding candlestick charting, since the latter part of the nineteenth century far-eastern traders have used candlesticks for charting markets and for analysis based on trends in market psychology. Recently introduced to the western world they have steadily gained in popularity here in the last two decades. Candlestick charting provides the same information as bar charting but in a different format. The candlestick consists of a rectangular body, the height of which represents the differences between the period's opening price and the period's closing price. A centerline projecting from the top of the rectangle extends upward to the period's high. A similar centerline extends from the bottom to the period's low. The candlestick is colored to indicate whether the price increased or decreased during the period covered Down periods are usually colored black or red while up periods are usually colored white or green (See FIG. 2. An advantage to candlesticks over bar charts is the rapid recognition of direction within a period due to the color of the rectangular body or “candle”. The shape of the body (depth verses width) along with the length of its top and bottom centerlines known as tails or shadows creates a unique configuration for each individual candlestick. In fact a whole area of technical analysis centers on the shapes of individual candlesticks.